He wants to run an Elf Barbarian type creature who basically is let off the leash, quite literally, only when the party wants to unleash murder and mayhem on the surrounding area. She'll be Chaotic Evil and I think the only reason she won't be attacking her own party is.... well, yet to be defined.
How should I alter the stats (like WIS CON and DEX) for an insane character? Should I bestow upon his character a collar that alters the stats while worn, maybe giving him a +1 AC vs. bite as a BS bonus? Should I enforce a permanent status decline as his character becomes more feral?
I want to make the campaign fun for everyone and I really like the uniqueness of this character, but I'm not quite sure how to handle it. Also, it should be noted, this is the first time this player has ever stepped up to the D&D table. (He's a WoW addict)
As for statting the insane character, don't worry about it. That's pure RP, he doesn't need bonuses or penalties to be insane. It sounds like he's into this idea, so just let him run with it and have fun.
IF you want to simulate a descent into madness that the player cannot control (and the player is ok with it, especially since this likely wouldn't apply to the other characters), there are rules for tracking insanity in the d20 adapation of Call of Cthulhu (and those rules were reprinted in Unearthed Arcana) or a similar but slightly simpler variant can be found in the 3pp book Darkness & Dread.
I say, let em rampage their way out of a town to start with. This is a great origin story for this kinda scenario. Perhaps even have the trauma of the barbarian slaughtering her hometown will be the justification story wise for her chaotic evil. A dark overlord could give the 'lead' character the leash that grants her control over the monster man. Obviously in this situation both players will be making major descisions about both characters. Power is usually the motivator that draws the dark side :sith:
As far as stats... I wouldn't mod the characters stats. There is a chaos prestige class that had an insanity feature where the character got massive modifiers to wisdom rolls based on circumstance, but I would lean more toward the idea of making sense motive checks extremely hard. Like plus 10 DC because they are thinking in such different ways than the normal people. Also perhaps making the insane character immune to fear? 
While requiring a will save v panic from a specific circumstance? I am thinking PTSD style insane, but if were talking more madness .....a comlete daily shift to reflect the bi-polor/dissociative shifts? Innability to make recall checks? :wink: The collar should be a powerful magical item. IMnsHO